Profit losses from brand damage covered in new policies

Mike Tsikoudakis

Sales and profits that are lost due to reputational and brand damage are an increasing concern for companies and organizations, and some in-surers have begun offering coverage that indemnifies financial losses stemming from such a crisis.

While many insurers offer reputational risk policies that cover the costs associated with responding to a crisis, few insurers indemnify revenue or profit that is lost as a result of the devaluation of a brand or reputation.

Such losses are attributed to a change in customer perception of an organization's brand that causes lost sales and revenue.

For such coverage, there is $25 million to $50 million in capacity in the London market, with one Lloyd's of London syndicate already offering capacity while a second syndicate is interested in doing so, said Emily Freeman, executive director of the technology and global privacy group at Lockton Cos. L.L.P. in London.

“There is wording and there is some capacity in London that we're building,” Ms. Freeman said. “It certainly is not a large enough market yet to be a real risk transfer for a Fortune 50 company.”

The coverage is triggered by an adverse media event that affects consumer trust and brand perception. Typically it is written on a named-peril basis and responds to specific areas of brand damage, such as data breaches or the disgrace of a key executive or advertising sponsor, Ms. Freeman said.

“There are a select few insurers who will underwrite to that on a case-by-case named-peril basis,” said Susan F. Friedman, New York-based senior vp at Marsh Inc.'s FINPRO practice.

Even with such coverage, a solid crisis plan is essential when an adverse event occurs, experts say (see related story).

Munich Reinsurance Co. offers reputational risk coverage for financial losses and the U.S. insurance unit of Zurich Financial Services Group Inc. recently received form approval for a product that may offer such coverage, sources said.

Zurich declined to comment.

Munich Re began offering reputational risk insurance for financial losses as a bespoke product last year and finalized stand-alone coverage this year, said Benedikt Schermutzki, Munich-based head of new risk solutions in Munich Re's special enterprise risks unit.

Munich Re offers named-peril and all-risks options for the coverage with limits up to e50 million ($65.5 million). It may offer more based on the client and the risk appetite, Mr. Schermutzki said.

Named perils, which can be customized to a client's reputational risks, include product recalls, data breaches and loss of a key person, among others.

The named-perils coverage is triggered when a covered risk event causes “turnover” to drop at least 10%. A survey is conducted among target clients to relate the event to their potential behavior. The survey results determine the payout, he said.

Turnover, which refers to revenue, is used because “we think it's a relatively objective measure. If there is a significant issue, turnover will react,” Mr. Schermutzki said.

What actually is covered is a gross profit margin that is a preagreed percentage of the turnover. “This is assumed to be the profit for purposes of indemnification under this cover,” he said.

The all-risks policy is triggered by a deterioration of media coverage, which is determined by a third-party media analysis firm. Under this coverage, the target client survey also is conducted.

“If there is then, for instance, after three months a drop in turnover, this would be indemnified,” Mr. Schermutzki said.

Pricing for the reputational risk coverage is roughly 1% to 2.5% on line and the all-risks option is slightly more expensive, he said.

While such a policy has not yet been sold, Mr. Schermutzki said there is high interest among the food and beverage, clothing and fashion, sports, toys, fragrances and chain restaurant industries. “In this shape and form, we only just now started to market it,” he said.

%%BREAK%%

In an offering it rolled out in May 2011, Lloyd's syndicate R.J. Kiln & Co. Ltd. launched reputation insurance coverage of financial losses as part of its enterprise disruption insurance, offering capacity up to $25 million, said Tom Hoad, London-based underwriter in the enterprise risk division for Kiln.

Risk factors such as large product recalls, loss of consumer data, harming consumer safety, waterborne or food-related illnesses, and adverse events affecting celebrity spokesmen “could actually lead to a loss of profit or revenue at the corporate level because of the change of consumer perception of the brand,” Mr. Hoad said.

“The Kiln underwriting product is the structure that links the peril to some form of media communication,” Mr. Hoad said. “We will pay the loss of profit attributable to the publication of the negative fact about the company.”

Kiln underwrites the program similar to the loss of income stemming from a business interruption, he said.

“Where companies show that there is an incident that we have predetermined in our underwriting criteria that gets into the press...it's the very publication of that incident that then itself loses them profit or revenue” and triggers the coverage, Mr. Hoad said.

Others in the insurance industry have examined the idea.

Rob Yellen, chief underwriting officer of executive liability for Chartis Inc. in New York, said that while Chartis does not provide coverage for financial loss of the value of brand or the company's reputation, it did consider it. The difficulty in determining a dollar value for brand damage was an impediment.

“We looked very heavily at providing that coverage and the fundamental challenge is that there is no formula that will easily give a specific number when you're done. It's an exceptionally difficult thing to calculate,” Mr. Yellen said.

“We're going to continue to look at the exposure and how insurance can provide insurance solutions. Our biggest challenge will be balancing what people are willing to pay with an exposure we can take on,” he said.

Randy Nornes, executive vp with Aon Risk Solutions in Chicago, said reputational risk coverage dealing with financial loss is in an “exploratory” phase with relatively small limits available, though some large European reinsurers are working to make that number bigger.

“There's been some interest in it. I would say it's more of a middle-market play,” Mr. Nornes said, noting that the coverage may suit smaller retail or manufacturing companies that deal with a single product.